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The Agribusiness Bulletin

The Agribusiness Bulletin focuses on national and local industry, as well as cross-industry insights and trends. This includes some of the drivers we expect to shape the future of the industry and potential challenges that may arise.

Background

The Australian forestry industry includes both softwood and hardwood plantations in addition to native forests used to generate wood products. Whilst the scale varies, every state within the country has some form of forest industry as seen in ABARES Australian Forestry Industry 2015 map.

Uses of Australian forests

Hardwoods and softwoods are often used for many of the same purposes, however, given softwoods are cheaper and easier to work with than hardwoods, they make up the bulk of all wood used in the world.

Hardwoods generally have a slower growth rate, a higher density and are usually more expensive than softwoods. Australian hardwoods such as ash, red gum, jarrah and blackwood are often used to build decks, flooring, and high-quality furniture. In order to produce these decorative products from plantation hardwood, maintenance, including pruning is required, which can be costly.

Softwoods such as pine are often used for non-decorative or lower value products, including medium-density fibreboard (MDF), paper, furniture and building components such as structural framing, roof trusses, doors and window frames.

Australia’s role – importing and exporting

The total value of imports of wood products to Australia is $4.1 billion and the value of exports of wood products is $2.0 billion. (ABARES Australia’s forests at a glance 2014 with data to 2012–13).

As seen below, Australia plays a relatively small role internationally in the trade of wood products, primarily exporting woodchips and other paper related products. There are a number of factors affecting current exports, including:

Reduced volumes into Japan as they move away from Australian hardwood woodchips (particularly native), preferring suppliers with PEFC and/or FSC sourced fibre. This is combined with increased supply from plantations in Vietnam and Chile

Increased exports into China, however this is predominantly on a spot market and delivered basis (i.e. CIF, CFR), which is priced lower than historical Japanese sales

Due to the exchange rate (which is now weakening) and the cost of land and growing, Australia is a high cost provider, but we are seen as a high quality supplier to north Asian markets. However, Vietnam has replaced Australia as the world’s largest hardwood woodchip exporter which is primarily price driven

Whilst the international market for woodchips has become more competitive, reducing the price received by Australian producers, particularly those marketing native forest hardwood residues, despite environmental concerns, we may see an increase in demand for native forest products in the medium term in Australia as there is likely to be a shortage of plantation hardwood available given the conversion of properties and reduced planting from 2010-2014 following MIS collapses.

Recent investment

There has been significant private sector investment in the forestry industry over the last five years with some state Governments realising or granting long term licences for both hardwood and softwood plantations (Queensland, South Australia and Tasmania). This private sector involvement has increased the commercialisation of Australian forests.

Following the collapse of several major Managed Investment Schemes (MIS), there has also been significant upheaval in the sector, particularly for crops grown specifically for pulp logs. Given the number of MIS related entities and the amount of crops planted from the early 1990’s though to 2009, arguably Tasmania has been the hardest hit with Western Australia close behind.

Current trends

There is a high likelihood that many properties used for MIS plantations may not be replanted after the first rotation due to their suitability. It is expected that this land will be reconverted to alternate higher and better uses, such as farming. This will have an impact on land values in some regional areas as the conversion of these properties back to an alternate use will create downward pressure on rural agribusiness properties as supply increases.

This is currently being seen in numerous Northern NSW municipalities where there are currently a large volume of former MIS plantation properties that have been reconverted back on the market. Given the MIS collapses and challenging market conditions for woodchips, there are several states where harvest and haulage contractors are showing signs of distress. This appears to be as a result of many forest operators supporting harvest and haulage contractors with small, short term spot contracts. This creates inefficiency and cash flow concerns. As a result, contractors are stretching their own creditors and are unable to upgrade equipment, creating further inefficiency. Offering longer term and larger volume contracts to a select group of contractors could allow industry consolidation and improve efficiency.

Saw milling

As seen below, the last decade has seen a major restructuring of the sawmilling industry, particularly hardwood sawmills. A contraction of the sector as native forest logging has seen smaller wood processors experience the most dramatic declines. In contrast, consolidation of softwood sawmills has led to larger processors whose volumes have increased over last 25 years.

Volume of sawlogs harvested and number of sawmill, Australia, 1999-2000 to 2012-13

A weakening AUD, as forecast by Deloitte Access Economic, may create an increased demand for Australian wood products which will have a significant effect on the industry by supporting investment (and upgrade) in wood processing infrastructure that will underpin the future growth of the industry as increased volumes of plantation hardwood becomes available over the coming decade.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see About Deloitte for a detailed description of DTTL and its member firms.